If you buy the securities industry line, Regulation FD has succeeded all too well in drying up nonpublic disclosure. But you can still get the early skinny: Belong to a medical research organization and get potentially important, market-moving information before anyone else, even though no one intends it to be that way.
It comes down to how these organizations handle the release of research abstracts in the weeks prior to their scientific meetings. These abstracts contain condensed summaries of drug tests, which make them key indicators of how safe or effective a new drug might be. Investors pay close attention to these abstracts, moving shares of biotech and drug companies higher or lower based on their contents.
For medical organizations, the choice is between first serving the needs of their members -- the doctors and researchers who attend their conferences -- and then worrying about the larger investing public. They get no guidance from the
Securities and Exchange Commission
, partly because the medical organizations sit squarely in one of Reg FD's loopholes.
The Abstracts Are in the Mail
Often the conflict is resolved in favor of doctors and researchers, which means organizations don't give all investors equal access to research abstracts. The American Society of Clinical Oncology, the American Heart Association and the American College of Rheumatology, for instance, release abstracts to its members only. This privileged information often gets into the hands of Wall Street professionals, who trade on it before the general investing public gets a chance.
This week, the American College of Rheumatology will post research abstracts for its November annual meeting on a password-protected Web site open to members only. Several biotech hedge funds are licking their chops over getting their hands on one abstract in particular: late-stage tests results for D2E7, an experimental rheumatoid arthritis drug from
that's been generating a lot of buzz lately. Abbott may choose to publicize the D2E7 abstract on its own, but the American College of Rheumatology won't grant the general investing public access to the abstracts until the meeting begins on Nov. 11, according to the group's spokeswoman.
At the end of October, the American Heart Association will mail out a special issue of its journal,
, containing the research abstracts for its annual meeting, also starting Nov. 11. These abstracts won't be made available to the public until the meeting starts, and won't be posted online until after the meeting ends.
In the weeks before ASCO held its annual meeting in May, Wall Street insiders took early positions in companies like
, among others, which were expected to release positive news about experimental cancer drugs.
examined the "ASCO effect" on biotech stocks in a series of recent articles.
These policies seem to violate the core tenets of Regulation FD, which is supposed to level the playing field by prohibiting companies from selectively disclosing market-moving information to the Wall Street investment community.
But that's not necessarily the case. Medical organizations -- most of which are nonprofit -- can do whatever they please with research abstracts because Regulation FD doesn't specifically address their existence. The regulation only deals specifically with selective disclosure of material, nonpublic information from a company and its executives. But medical groups like ASCO, American College of Rheumatology and the American Heart Association are independent third parties -- essentially middlemen -- and are not covered.
"We want to be in concert with any SEC regulations," says Tim Elsner, director of media relations for the American Heart Association. "But our first priority is to present the science, and part of that means releasing abstracts to our members so they can plan their schedules
for the meeting.
"If there are trading implications, we want there to be as even a playing field as we can get," Elsner adds. "If the SEC makes any adjustments
to Regulation FD, we would certainly abide by those changes."
But help from the SEC doesn't appear likely. An SEC spokesman refused to discuss the ambiguous situation medical research groups find themselves in, only saying the regulatory body had no plans to make significant changes to Regulation FD at this time.
The American Heart Association is trying to cut down on any potential stock trading prior to its meeting by placing restrictions, or embargoes, on the information contained in the abstracts. For the first time, the
issue containing the abstracts will be accompanied with a prominent warning of AHA's embargo policy on the outside. The policy prohibits anyone -- members, researchers, sponsoring drug companies, the press, and Wall Street analysts -- from disseminating information in the abstracts until they are presented at the meeting.
"We intend these abstracts to go to researchers who are attending our meeting," says Elsner. "We know that non-medical people attend our meeting, but they're still covered by the embargo."
ASCO and the American College of Rheumatology have adopted similarly strict embargo policies. Unfortunately, the rules don't have teeth and violators are not dealt with uniformly.
Wall Street's Early Peek
Tammy Cussimanio, director of communications for the ACR, acknowledges, for instance, that investment banking analysts do acquire abstracts and write research reports advising their clients how to trade on that information prior to the meeting. While this is a violation of ACR's embargo policy, nothing can really be done to punish the offending analyst, she admits.
Sell-side analysts who wrote research reports for their clients discussing abstracts in advance of the ASCO meeting last May were similarly let off the hook. But a reporter from
was barred from the cancer meeting after writing a story based on information contained in these brokerage reports.
Now, many medical groups are dealing with this dilemma by releasing the research abstracts to everyone at the same time, mainly by making them freely available online.
The American Society of Hematology will post abstracts online -- readable by everyone -- for its December annual meeting in early November, according to Jennifer Hamilton, the group's director of programs.
The American Diabetes Association did the same thing for its annual meeting, held last June. So did the American Society for Microbiology, which rescheduled its scientific conference from late September to December because of the Sept. 11 terrorist attacks.
Unfortunately, this disclosure policy doesn't solve all problems.
"Posting the abstracts online made us too vulnerable because it almost eliminated the need to hold a meeting in the first place," says Bernadette King, until recently the communications director at the American Diabetes Association. King is referring to the fact that a thorough and public airing of abstracts eliminated much of the surprise from the meeting, reducing the sense of urgency used to lure attendees.
King says she and her colleagues also used a strict embargo policy on the republishing of abstracts to keep results under wraps. But the rules were widely flouted. In one case, King even called up and scolded a sell-side analyst for writing a research report based on abstracts for
. King says the analyst basically blew off her concerns, apparently believing that there was nothing she could do to stop him.
This sour experience prompted drastic changes for the group's 2002 annual meeting, says King. The American Diabetes Association has decided to step back and make abstracts available only to members prior to the meeting. It will also step up efforts to make sure that these abstracts don't fall into the hands of the Wall Street investment community.
"Is this a violation of the Regulation FD, or at least the spirit of Regulation FD?" asks King, rhetorically. "That's not an easy question to answer and we haven't figured it out completely yet.
"But what we do know is that, above all, we must protect the integrity of our science. Yes, we're concerned with SEC regulations, but at this point we don't know how to address these two very different constituencies simultaneously."